TOKYO, May 21 The Bank of Japan kept policy
steady on Wednesday and painted a slightly more optimistic view
of the economy, dropping a reference to the country being in
deflation and further dashing expectations it will offer more
stimulus any time soon.

Governor Haruhiko Kuroda voiced confidence that Japan is on
track to meet the bank's 2 percent price target, stressing that
the economy will emerge from a temporary slowdown caused by last
month's sales tax hike around summer as wages and jobs rise.

The upbeat comments came after the BOJ revised up its
assessment on capital expenditure, long a soft spot in the
economy, and removed a reference that Japan was in deflation for
the first time since it deployed a massive stimulus programme
last April.

"Most of the wage negotiations have concluded, which shows
that not only big firms but smaller firms are raising wages
including regular pay. Improvements in job market conditions are
continuing."

The yen rose to a 3-1/2 month high against the dollar
and the euro after Kuroda's rosy projections on the outlook,
which gave no hint of further monetary easing in the near term.

"From today's comments, I feel that the BOJ is very
confident," said Takuji Aida, chief economist at Societe
Generale Securities in Tokyo.

"We cannot expect any easing this year, but next year the
BOJ will be able to confirm that the actual trend of consumer
prices is weaker than expected and they will have to ease."

As widely expected, the BOJ maintained its monetary policy
framework put in place last April, under which it pledges to
increase base money by 60-70 trillion yen ($593-$691 billion)
per year via aggressive asset purchases, largely of Japanese
government bonds (JGBs).

In a statement issued after the decision, the BOJ removed a
phrase describing Japan as being in deflation, underscoring its
confidence about meeting its price target without additional
stimulus.

Kuroda sounded unfazed by recent rises in the yen that were
hurting Japanese stock prices, saying he saw no reason for the
currency to keep rising as the BOJ maintains its ultra-loose
policy even as the Federal Reserve tapers its asset purchases.

Some market players, however, took Kuroda's bullish comments
as more a strategy to keep the positive psychology alive, since
his stimulus programme relies heavily on sentiment.

"I think they want to keep maintaining the inflation
expectations and the growth expectations so that the Japanese
economy will not lose momentum," said Tadashi Matsukawa, head of
Japan fixed income at PineBridge Investments.

"He just continued to be hawkish, and I think the difference
between the market economists and Kuroda remain wide."

RISKS LOOM

Japan's economy clocked its fastest pace of growth in more
than two years in the first quarter as consumer spending jumped
and business investment turned surprisingly strong ahead of a
sales tax hike last month to 8 percent from 5 percent.

Some economists and politicians have argued the tax hike
could dent the success achieved so far under premier Shinzo Abe
through aggressive monetary easing and big fiscal spending.

But there is growing evidence that any damage will be
limited. A Reuters survey showed companies expect sales to
bounce back and are more willing to raise wages.

Businesses also raised machinery orders by the most ever in
March, underscoring the BOJ's view that firms, many of which saw
profits rise thanks to a weak yen and robust domestic demand,
will finally ramp up spending to replace old facilities.

With consumer inflation having exceeded 1 percent, some
academics feel the central bank should start considering how to
exit its stimulus programme.

"They should be talking about tapering at a minimum, and
they should begin preparing financial markets for a regime after
2 percent, a shift from stimulating aggregate demand to
stimulating aggregate supply," Dale W. Jorgenson, professor of
economics at Harvard University, told Reuters on Wednesday.

Many mainstream Japanese economists, however, agree with the
BOJ that talking about an exit now is premature with the
recovery still fragile and bound with uncertainty.

For one, exports, which hold the key to whether Japan can
sustain its recovery, have failed to pick up to the
disappointment of the BOJ, which kept its view unchanged to say
shipments have recently "leveled off more or less."

Exports rose 5.1 percent in the year to April, trade data
showed on Wednesday, exceeding a median market forecast and a
1.8 percent increase in March. But they rose a meagre 0.6
percent in April from the previous month on a seasonally
adjusted basis.

Analysts say the BOJ may act if the trade performance falls
short - a side effect of many firms moving production facilities
offshore to escape years of the yen's strength.

Private-sector economists also remain deeply sceptical about
the BOJ's rosy projection on prices, arguing that consumer
inflation won't accelerate as quickly as the central bank
expects in a country long mired in deflation.
($1 = 101.3450 Japanese Yen)
(Additional reporting by Stanley White, Kaori Kaneko and Lisa
Twaronite; Editing by Kim Coghill)

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